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Negotiations begin to secure Downing Street

Conservative leader Cameron asks Lib Dems for help in forming government

By

WilliamL. Watts

AudeLagorce

LONDON (MarketWatch) -- The election is over, but the battle to rule Britain has just begun.

Conservative leader David Cameron, whose party bested the incumbent Labour party but failed to win an outright majority in the House of Commons, said Friday he would seek the support of the smaller Liberal Democrats in an attempt to form a government.

'The procrastination and dithering by the leaders of the various countries in the euro zone ... has been a major contributory factor to the worsening of the sovereign-debt crisis, and we do not want a repeat performance in the U.K.'
Ted Scott, F&amp;C Investments

The Liberal Democrats, who failed to overcome their third-party status in Thursday's general election, appeared set to play kingmaker. The Lib Dems could endorse or join either the incumbent Labour Party or the opposition Conservatives in forming the nation's next government, following the closest general election here in a generation.

Cameron made what he called a "big, open and comprehensive offer" to work with the Liberal Democrats in forming a new government. He boasted that his party had enjoyed its biggest surge in support since the 1930s, but acknowledged it had fallen short of winning an overall majority.

Earlier, Lib Dem leader Nick Clegg said the Conservatives, as the largest vote-getters, should have first crack at attempting to form a government.

If the Lib Dems make a coalition agreement the price of their support, the party's popular Treasury spokesman and deputy leader, Vince Cable, could end up as chancellor of the exchequer, with Clegg also potentially in the cabinet.

Political betting market Smarkets sees a 19% chance Cable will be the next chancellor, while Conservative shadow chancellor George Osborne remains the favorite at 85%.

British Prime Minister Gordon Brown said he respected Clegg's desire to first meet with the Tories, but said Labour was prepared to discuss areas of common ground with the Lib Dems if the talks fail to produce an agreement. A combination of Labour and the Lib Dems, however, would also fall short of a 326-seat majority.

Cameron appeared to leave open the option of forming a minority government with the backing of the Lib Dems, or exploring a formal coalition arrangement with the nation's third party.

There is no formal deadline for a government to be formed. But in practical terms, it must happen before May 25, when the customary Queen's Speech is due to lay out the government's priorities during the parliament.

Rearranging chairs

The Conservatives secured 306 seats in the House of Commons, a gain of 97. Labour lost 91 seats to hold a total of 258, while the Lib Dems secured 57 seats, a decline of five. The one remaining constituency had its election delayed until May 27 due to the death of a candidate last month.

The results left the Conservatives short of the 326 seats needed for an outright majority in the 650-seat House of Commons.

As it became clear the results would result in no party commanding a majority -- a situation known as a hung parliament -- negotiations began in earnest in the corridors of Westminster.

"It seems this morning that it's the Conservative party that has more votes and more seats, though not an absolute majority, and that is why I think it is now for the Conservative party to prove that it is capable of seeking to govern in the national interest," Clegg said.

Brown made clear he was ready to explore prospects of a tie-up with the Liberal Democrats, while saying he respected Clegg's decision to talk with Cameron first. Brown, in a brief statement delivered outside of 10 Downing Street, said he stood ready to talk with Clegg if negotiations with the Conservatives failed.

The prime minister added that Labour had areas of agreement with the Lib Dems and emphasized a commitment to legislation on reform of Britain's voting system -- a top Liberal Democrat priority that has been fiercely opposed by the Conservatives.

Cameron said there was common ground between the Conservatives and the Lib Dems on a number of issues, and said he would back an all-party look at possible reforms to the voting system.

According to Cameron, it was crucial amid global financial market turmoil to quickly form a government. He re-emphasized the Conservatives' call to begin making big budget cuts immediately this year, a move that was oppose by both Labour and the Lib Dems, who charged the cuts would threaten to push Britain into a double-dip recession.

The inconclusive election results produced choppy action in financial markets.

The British pound initially fell against the dollar late Thursday as exit polls pointed to a hung parliament, then rebounded as early results indicated Conservative momentum. It then fell sharply as it became apparent a hung parliament was the likely result. The pound
GBPUSD, -0.4752%
was down 1% vs. the U.S. dollar at $1.4727 in recent action. Read Currencies.

The U.K. FTSE 100 Index (UKX) fell 2.6% to 5,123.02, after posting large swings throughout the session. The yields on U.K. 10-year government bonds, or gilts, were around a basis point higher at 3.76%. Bond prices move inversely to yields. See London Markets.

The volatile trading in U.K. markets was also influenced by turmoil in sovereign-debt markets.

The election result "is likely to create more uncertainty when we least need it," said Ted Scott, director of U.K. strategy at F&C Investments.

It's crucial for party leaders to put together a government soon, he added. "The procrastination and dithering by the leaders of the various countries in the euro zone and the [European Central Bank] has been a major contributory factor to the worsening of the sovereign-debt crisis, and we do not want a repeat performance in the U.K."

The Conservatives have so far secured 36% of the vote compared with 29% for Labour.

The Lib Dems had a disappointing night, failing to gain nearly as many seats as polls predicted before Thursday's vote. Support for the Liberal Democrats stood at 23% of the vote. Nationwide, the results reflected a 5.1% swing to the Conservatives from Labour from the 2005 general election.

Clegg said it seemed that people, at a time of great economic uncertainty, eventually decided to stick with what they knew best.

It was now "vital" for all political leaders and parties to "act in the national interest," he commented, and again called for the reform of an electoral system he said was "broken and doesn't reflect the hopes and aspirations of the British people."

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